Essay on the Nature of Commerce in General
Richard Cantillon
1755
Part Two
Chapter One
Of Barter
In Part I an attempt was made to prive that the real value of
everything used by manis proportionate tothe quantity of Land
used for its production and for the upkeep of those who have
fashioned it. In this second part, after summing up the different
degrees of fertility of the land in several countires and the
different kinds of produce itcan bring forth with greater
abundance according to its intrinsic quality, and assuming the
establishment of towns and their markets to facilitate the sale
of these products,it will be shewn by comparing exchanges which
may be made, wine for cloth, corn for shoes, hats, etc. and by
the difficulty which the transport of these different products or
merchandises would involve, that it was impossible to fix their
respective intrinsic value, and there was absolute necessity for
man to find a substance easily transportable, not perishable, and
having by weight a proportion or value equal to the different
products and merchandises, necessary or convenient. Thence arose
the choice of gold and silver for large business and of copper
for small traffic.
These metals are not only durable and easily transported
but correspond to the employment of a large area of land for
their production, which gives them the real value desirable in
exchange.
Mr Locke who, like all the English writers on this
subject, has looked only to market prices, lays down that the
value of all things in proportionable to their abundance or
scarcity, and the abundance or scarcity of the silver for which
they are exchanged. It is generally known that the prices of
produce and merchandise have been raised in Europe since so great
a quantity of silver has been brought thither from the West
Indies.
But I consider that we must not suppose as a general rule
that the market prices of things should be proportionable to
their quantity and to that of the silver actually circulating in
one place, because the products and merchandise sent away to be
sold elsewhere do not influence the price of those which remain.
If, for example, in a market town where there is twice as much
corn as is consumed there, we compared the whole quantity of corn
to that of silver, the corn would be more abundant of corn to
that of silver, the corn would be more abundant in proportion
than the silver destined for its purchase; the market price,
however, will be maintained just as if there were only half the
quantity of corn, since the other half can be and even must be,
sent into the city, and the cost of transport will be included in
the city price which is always higher than that of the town. But
apart from the case of hoping to sell in another market, I
consider that Mr Locke's idea is correct in the sense of the
following chapter, and not otherwise.
Chapter Two
Of Market Prices
Suppose the butchers on one side and the buyers on the
other. The price of meat will be settled after some altercations,
and a pound of beef will be in value to a piece of silver pretty
nearly as the whole beef offered for sale in the market is to all
the silver brought there to buy beef.
This proportion is come at by bargaining. The butcher
keeps up his price according to the number of buyers he sees; the
buyers, on their side, offer less according as they think the
butcher will have less sale: the price set by some is usually
followed by others. Some are more clever in puffing up their
wares, other in running them down. Though this method of fixing
market prices has no exact or geometrical foundation, since it
often depends upon the eagerness or easy temperament of a few
buyers or sellers, it does not seem that it could be done in any
more convenient way. It is clear that the quantity of produce or
of merchandise offered for sale, in proportion to the demand or
number of buyers, is the basis on which is fixed or always
supposed to be fixed the actual market prices; and that in
general these prices do not vary much from the intrinsic value.
Let us take another case. Several maître d'hôtels have
been told to buy green peas when they first come in. One master
has ordered the purchase of 10 litrons for 60 livres, another 10
litrons for 50 livres, a third 10 for 40 livres and a fourth 10
livres for 30 livres. If these orders are to be carried out there
must be 40 litrons of green peas in the market. Suppose there are
only 20. The vendors, seeing many buyers, will keep up their
prices, and the buyers will come up to the prices prescribed to
them: so that those who offer 60 livres for 10 litrons will be
the first served. The sellers, seeing later that no one will go
above 50, will let the other 10 litrons go at that price. Those
who had orders not to exceed 40 and 30 livres will go away empty.
If instead of 40 litrons there were 400, not only would
the maître d'hôtels get the new peas much below the sums laid
down for them, but the sellers in order to be preferred one to
the other by the few buyers will lower their new peas almost to
their intrinsic value, and in that case many maîtres d'hôtels who
had no orders will buy some.
It often happens that sellers who are too obstinate in
keeping up their price in the market, miss the opportunity of
selling their produce or merchandise to advantage and are losers
thereby. It also happens that by sticking to their prices they
may be able to sell more profitably another day.
Distant markets may always effect the prices of the market
where one is: if corn is extremely dear in France it will go up
in England and in other neighbouring countries.
Chapter Three
Of the Circulation of Money
It is the general opinion in England that a farmer must
make three rents. (1) The principal and true rent which he pays
to the proprietor, supposed equal in value to the produce of one
third of his farm, a second rent for his maintenance and that of
the men and horses he employs to cultivate the farm, and a third
which ought to remain with him to make his undertaking
profitable.
The same idea obtains generally in the other countries of
Europe, though in some, like the Milanese state, the farmer gives
the landlord half the produce instead of a third, and many
landlords in all countries try to let their farms at the highest
rent they can; but when this is above a third of the produce the
farmers are generally very poor. I doubt not that the Chinese
landowner extracts from his farmer more than three fourths of the
produce.
However when a farmer has some capital to carry on the
management of this farm the proprietor who lets him the farm for
a third of the produce will be sure of payment and will be better
off by such a bargain than if he let his land at a higher rate to
a beggarly farmer at the risk of losing all his rent. The larger
the farm the better off the farmer will be. This is seen in
England where the farmers are generally more prosperous than in
other countries where the farms are small.
The assumption I shall make in this enquiry as to the
circulation of money is that farmers earn three rents and spend
the third rent on living more comfortably instead of saving it.
It is in fact the case with the greatest number of farmers in all
countries.
All the produce of the country comes directly or
indirectly from the hands of the farmers as well as all the
materials from which commodities are made. It is the land which
produces everything but fish, and even then the fishermen who
catch the fish must be maintained on the produce of the land.
The three rents of the farmer must therefore be considered
as the principal sources or so to speak the mainspring of
circulation in the state. The first rent must be paid to the
landowner in ready money: for the second and third rents ready
money is needed for the iron, tin, copper, salt, sugar, cloth and
generally all the merchandise of the city consumed in the
country; but all that hardly exceeds the sixth part of the total
or three rents. As for the food and drink of the country folk
ready money is not necessarily to obtain it.
The farmer may brew his beer or make his wine without
spending cash, he can make his bread, kill the oxen, sheep, pigs,
etc. that are eaten in the country: he can pay in corn, meat and
drink most of his assistants -- not only labourers but country
artisans, valuing the produce at the prices of the nearest
markets and labour at the ordinary price of the locality.
The things necessary to life are food, cloths, and
lodging. There is no need of cash to obtain food in the country,
as I have just explained. If coarse linen and cloths are made
there, if houses are built there, as is often done, the labour
for all this may be paid in barter by valuation without cash
being needed.
The only cash needed in the country is that for the
principal rent of the landlord and for the manufactures which the
country necessarily draws from the city, such as knives,
scissors, pins, needles, cloths for some farmers or other
well-to-do people, the kitchen utensils, plates, and generally
all that is got from the city. I have already observed that it is
reckoned that half the inhabitants of a state live in the cities,
and consequently the citizens spend more than half the produce of
the land. Cash is therefore necessary, not only for the rent of
the landlord, corresponding to one third of the produce, but also
for the city merchandise consumed in the country, which may
amount to something more than one sixth of the produce of the
soil. But one third and one sixth amount to half the produce. The
cash circulating in the country must therefore be equal to at
least one half the produce of the land, by which means the other
half or somewhat less may be consumed in the country without need
of cash.
The circulation of this money takes place when the
landlords spend in detail in the city the rents which the farmers
have paid them in lump sums, and when the undertakers of the
cities, butchers, bakers, brewers, etc. collect little by little
this same money to buy from the farmers in lump sums cattle,
wheat, barley, etc. In this way all the large sums of money are
distributed in small amounts, and all the small amounts are then
collected to make payments in large amounts, directly or
indirectly, to the farmers, and this money large or small always
passes in return for services.
When I stated that for the country circulation there is
needed a quantity of money often equal in value to half the
produce of the land, this is the minimum; and in order that the
country circulation should be easily conducted I will suppose
that the ready cash which conducts the circulation of the three
rents, is equal in value to two of these rents, or two thirds of
the produce of the land. It will be seen later that this
supposition is not far from the truth.
Let us now imagine that the money which conducts the whole
circulation of a little state is equal to 10,000 ounces of
silver, and that all the payments made with this money, country
to city, and city to country, are made once a year; and that
these 10,000 ounces of silver are equal in value to two of the
rents of the farmers or two thirds of the produce of the land.
The rents of the landlords will correspond to 5000 ounces, and
the whole circulation of the remaining silver between the country
people and the citizens, made by annual payments, will correspond
also to 5000 ounces.
But if the landlords stipulate with their farmers for half
yearly instead of yearly payments, and if the debtors of the two
other rents also make their payments every six months, this will
alter the rapidity of circulation: and whereas 10,000 ounces were
needed to make the annual payments, only 5000 will now be
required, since 5000 ounces paid twice over will have the same
effect as 10,000 ounces paid once.
Further if the landlords stipulate with their farmers for
quarterly payments, or if they are satisfied to receive their
rents from the farmers according as the four seasons of the year
enable them to sell their produce, and if all other payments are
made quarterly, only 2500 ounces will be needed for the same
circulation which would have been conducted by 10,000 ounces paid
once a year. Therefore, supposing all payments made quarterly in
the little state in question, the proportion of the value of the
money needed for the circulation is to the annual produce of the
soil (or the three rents), as 2500 livres is to 15,000 livres, or
as 1 to 6, so that the money would correspond to the sixth part
of the annual produce.
But seeing that each branch of the circulation in the
cities is carried out by undertakers, that the consumption of
food is met by daily, weekly or monthly payments, and that
payment for the clothing purchased once or twice a year by
families is made at different times by different people; and
whereas the expenditure on drink is usually made daily, that on
small beer, coal, and a thousand other articles of consumption is
very prompt, it would seem that the proportion we have
established for quarterly payments would be too high and that the
circulation of a land produce of 15,000 ounces of silver in value
could be conducted with much less than 2500 ounces of silver in
ready money.
As however the farmers have to make large payments to the
landlords at least every quarter and the taxes which the prince
or the state collects upon consumption are accumulated by the
collectors to make large payments to the Receivers-General, there
must be enough ready cash in circulation to make these large
payments without difficulty, without hindering the circulation of
currency for the food and clothing of the people.
It will be seen from this that the proportion of the
amount of money needed for circulation in a state is not
incomprehensible, and that this amount may be greater or less in
a state according to the mode of living and the rapidity of
payments. But it is very difficult to lay down anything definite
as regards this quantity in general, as the proportion may differ
in different countries, and it is only conjectural when I say
that "the real cash or money necessary to carry on the
circulation and exchange in a state is about equal in value to
one third of all the annual rents of the proprietors of the said
state."
Supposing the money in circulation equal to the third of
all the rents of the landowners and these rents equal to the
third of the annual produce of the land, it follows that "the
money circulating in a state is equal in value to the ninth part
of all the annual produce of the soil."
Sir William Petty, in a manuscript of 1685, supposes
frequently that the money in circulation is equal to one tenth of
the produce of the soil. He gives no reason. I suppose it is an
opinion which he formed from experience and from his practical
knowledge both of the money circulating in Ireland (a great part
of the land of which country he had measured as a surveyor) and
of the produce which he estimated roughly from observation. I am
not far removed from his conclusion to the landlords' rents which
are ordinarily paid in money and easily ascertainable by a
uniform land tax, rather than to the products of the soil, the
prices of which vary daily in the markets, and a large part of
which is consumed without entering into the market. In the next
chapter I shall give several reasons, supported by examples, to
confirm my conclusion. I think it useful, even if not
mathematically exact in each country. It is enough if it is near
the truth and if it prevents the governors of states from forming
extravagant ideas of the amount of money in circulation. There is
no branch of knowledge in which one is more subject to error than
statistics when they are left to imagination, and none more
demonstrable when they are based upon detailed facts.
Some cities and states which have no land belonging to
them subsist by exchanging their labour or manufactures for the
produce of the land of others. Such are Hamburg, Dantzig, several
other cities of the Empire, and even part of Holland. In these
states it seems more difficult to estimate the circulation. But
if we could estimate the amount of foreign land which furnishes
their subsistence, the calculation would probably not differ from
that I have made for the other states which live chiefly on their
own produce and are the subject of this essay.
As to the cash needed to carry on foreign trade it seems
that no more is required than what is in circulation in the state
when the balance of foreign trade is equal, that is when the
products and merchandise sent abroad are equal in value to those
imported.
If France sends cloth to Holland and receives from her
spices, of equal value, the landowner who consumes these spices
pays the value of them to the grocer, who pays the same amount to
the clothmaker, to whom it is due in Holland for the cloth he has
sent there. This is done by bills of exchange which will be
explained later. These two money payments take place in France
apart from the rent of the landowner, and no money leaves France
on that account. All other classes of society who consume Dutch
spices, similarly pay the grocer, viz. those who live on the
first rent, that is the landowners, pay from this rent, and those
who live on the other two rents in country or in city pay the
grocer directly or indirectly out of the money which conducts the
circulation of these rents. The grocer again pays this money to
the manufacturer for his bill upon Holland, and no increase of
money is needed for circulation in the state because of foreign
trade when the balance is equal. But if it is not equal, if more
merchandise is sold to Holland than is bought back, or vice
versa, money is needed for the surplus which Holland must send to
France or France to Holland. This will increase or diminish the
amount of money circulating in France.
It may even occur that when the balance with the foreigner
is equal to the trade with him may retard the circulation of
ready money and therefore require a greater quantity of money by
reason of this commerce.
For example, if the French ladies who wear French stuffs
wish to wear Dutch velvets, which are paid for by the cloth sent
to Holland, they will pay for these velvets to the merchants who
imported them from Holland, and these merchants will pay the
manufacturers of cloth. The money thus passes through more hands
than if these ladies took their money to the manufacturers of
cloth and contented themselves with the fabrics of France. When
the same money passes through the hands of several undertakers
the rapidity of circulation is slowed down. But it is difficult
to make an exact estimate of this sort of delay which depends
upon various circumstances. Thus, in our present example, if the
ladies pay the merchant for the velvet today, and the merchant
pay the manufacturer tomorrow for his bill on Holland, if the
manufacturer pay the wool merchant the next day and this last pay
the farmer the day after, it is possible that the farmer will
keep the money in hand more than two months to make up the
quarter's rent which he must pay his landlord. This money might
in two months have circulated through the hands of a hundred
undertakers without locking up the circulating medium needed by
the state.
After all, the principle rent of the landowner must be
considered to be the most necessary and considerable branch of
the money in regard to circulation. If he lives in the city and
the farmer sells in the same city all his produce and buys there
all the merchandise necessary for country use, the ready money
may always remain in the city. The farmer will sell there produce
exceeding half the output of his farm; he will pay his landlord
in the same city the money value of one third of his produce and
the rest to merchants or undertakers for merchandise to be
consumed in the country. Even here, however, as the farmer sells
his produce for lump sums, which are subsequently distributed in
retail purchases, and are again collected to serve for lump
payments to the farmers, the circulation has always the same
effect (subject to its rapidity) as if the farmer took to the
country the money received for his produce and sent it back again
to the city.
The circulation consists always of this, that the large
sums which the farmer receives on the sale of his produce are
split up in detail and then brought together again to make large
payments. Whether this money go partly out of the city or remain
there entirely it may be regarded as the circulating medium
between city and country. All the circulation takes place between
the inhabitants of the state, and they are all fed and maintained
in every way from the produce of the soil and raw materials of
the country.
It is true that the wool, for example, which is brought
from the country, when made up into cloth in the city is worth
four times its former value. But this increase of value, which is
the price of the labour of the workmen and manufactures in the
city, is exchanged for the country produce which serves for their
maintenance.
Chapter Four
Further Reflection on the Rapidity or Slowness of the
Circulation of Money in Exchange
Let us suppose that the farmer pays 1300 ounces of silver
a quarter to his landlord, who pays out of it every week 100
ounces to the baker, butcher, etc. and that these every week pay
the farmer these hundred ounces, so that the farmer collects
every week as much money as the landlord spends. In this case
there will be only 100 ounces in constant circulation, the other
1200 ounces will remain in hand partly with the landlord and
partly with the farmer.
But it rarely happens that the landlords spend their rents
in a fixed and regular proportion. In London as soon as a
landlord receives his rent he puts most of it into the hands of a
goldsmith or banker, who lends it at interest, so that this part
is in circulation. Or else the landlord spends a good part of it
upon various things needful for his household, and before he gets
his next quarter's rent he will perhaps borrow money. Thus the
money of the first quarter's rent will circulate in a thousand
ways before it can be brought together again and replaced in the
hands of the farmer to serve to pay his second quarter.
When the time for paying this second quarter has come the
farmer will sell his produce in large amounts, and those who buy
his cattle, corn, hay, etc. will already have collected in detail
the price of them. The money of the first quarter will thus have
circulated in the rivulets of small traffic for nearly three
months, before being collected by the retail dealers, and these
will give it to the farmer who will pay his second quarter
therewith. It would seem from this that less ready money than we
have supposed would suffice for the circulation of a state.
Barters made by evaluation do not all call for much ready
cash. If a brewer supplies a clothier with the beer for his
family, and if the clothier in turn supplies the brewer with the
clothes he needs, both at the market price current on the day of
delivery, the only ready money needed between these two traders
is the amount of the difference between the two transactions.
If a merchant in a market town sends to a correspondent in
the city country produce for sale, and if the latter sends back
to the former the city merchandise consumed in the country, the
business lasting the whole year between these two dealers, and
mutual confidence leading them to place to their accounts their
produce and merchandise at their respective market prices, the
only real money needed for this commerce will be the balance
which one owes to the other at the end of the year. Even then
this balance may be carried forward to the next year, without the
actual payment of any money. All the undertakers of a city, who
have continually business with each other, may practise this
method. And these exchanges by valuation seem to economise much
cash in circulation, or at least to accelerate its movement by
making it unnecessary in several hands through which it would
need to pass without this confidence and this method of exchange
by valuation. It is not without reason that it is commonly said
commercial credit makes money less scarce.
The goldsmiths and public bankers, whose notes pass
current in payment like ready money, contribute also to the speed
of circulation, which would be retarded if money were needed in
all the payments for which these notes suffice: and although
these goldsmiths and bankers always keep in hand a good part of
the actual money they have received for their notes, they also
put into circulation a considerable amount of this actual money
as I shall explain later in dealing with public banks.
All these reflections seem to prove that the circulation
of a state could be conducted with much less actual money than I
have supposed necessary; but the following inductions appear to
counterbalance them and to contribute to the slowing down of the
circulation.
I will first observe that all country produce is furnished
by labour which may possibly, as already often suggested, be
carried on with little or no actual money. But all merchandise is
made in cities or market towns by the labour of men who must be
paid in actual money. If a house has cost 100,000 ounces of
silver to build, all this sum or the greatest part of it, must
have been paid every week in small amounts to the brickmaker,
masons, carpenters, etc. directly or indirectly. The expense of
the humble families, who are always the most in number in a city,
is necessarily made with actual money. In these small exchanges
credit, book debts, and bills cannot have a place. The merchants
or retailers demand cash for the things they supply: or if they
give credit to a family for a few days or months they require a
substantial money payment. A carriage builder who sells a
carriage for 400 ounces of silver in notes, will have to change
them into actual money to pay for all the materials and the men
who have worked on his carriage if they have worked on credit,
or, if he has paid them already, to start a new one. The sale of
the carriage will leave his profit and he will spend this to
maintain his family. He could not be satisfied with notes unless
he can put something aside or lay it out at interest.
The consumption of the inhabitants of a state is, in a
sense, entirely for food. Lodging, clothing, furniture, etc.
correspond to the food of the men who have worked upon them; and
in the cities all drink and food are of necessity paid for in
hard cash. In the families of landowners in the city food is paid
for every day or every week: wine in their families is paid for
every week or every month; hats, stockings, shoes, etc. are
ordinarily paid for in actual money, at least the payments
correspond to cash for the men who have worked upon them. All the
sums which serve to pay large amounts are divided, distributed,
and spread in small payments corresponding to the maintenance of
the workmen, manservants, etc. and all these sums are necessarily
collected and reunited by the undertakers and retailers who are
employed on the subsistence of the inhabitants to make large
payments when they buy the products of the farmers. An alehouse
keeper collects by sols and livres the sums he pays to the
brewer, who uses them to pay for all the grain and materials he
buys from the country. One cannot imagine anything is bought for
ready money in a state, like furniture, merchandise, etc. the
value of which does not correspond to the maintenance of those
who have worked upon it.
Circulation in the cities is carried out by undertakers
and always corresponds directly or indirectly to the subsistence
of the menservants, workmen, etc. It is not conceivable that it
can be effected in small detail without cash. Notes may serve as
counters in large payments for a certain time; but when the large
sums come to be distributed and spread into small transactions,
as is always the case sooner or later in the course of
circulation in a city, notes cannot serve the purpose and cash is
needed.
All this being presupposed, all the classes in a state who
practice some economy, save and keep out of circulation small
amounts of cash till they have enough to invest at interest or
profit. Many miserly and timid people bury and hoard cash for
considerable periods.
Many landowners, undertakers and others, always keep some
cash in their pockets or safes against unforeseen emergencies and
not to be run out of money. If a gentleman makes it his remark
that he never had less than 20 louis in his pocket throughout the
whole year, it may be said that this pocket has kept 20 louis out
of circulation for a year. One does not like to spend up to the
last sou, one is glad not be completely denuded, and to receive a
new instalment before paying even a debt with the money one has.
The capital of minors and of suitors is often deposited in
cash and kept out of circulation.
Beside the large payments which pass through the hands of
the farmers in the quarterly terms of the year there are many
others from one undertaker to another in the same terms, and
others at different times from borrowers to lenders of money. All
these sums are collected in retail trade, are spread abroad anew
and come back sooner or later to the farmer: but they seem to
require a more considerable amount of cash for circulation than
if these large payments were made in different times from those
when the farmers are paid for their produce.
In fine there is so great a variety in the different
orders of the inhabitants of the state and in the corresponding
circulation of actual money, that it seems impossible to lay down
anything precise or exact as to the proportion of money
sufficient for the circulation. I have adduced so many examples
and inductions only to make it clear that I am not far out of the
truth in my conclusion "that the actual money necessary for the
circulation of the state corresponds nearly to the value of the
third of all the annual rents of the landlords." When the
landlords have a rent which amounts to half the produce or more
than a third, a greater quantity of actual money is needed for
circulation, other things being equal. When there is great
confidence in the banks and in book credits less money will
suffice, as also when the rapidity of circulation is accelerated
in any other way. But I shall show later that public banks do not
afford so many advantages as is usually supposed.
Chapter Five
Of the Inequality of the circulation of hard money in a state
The city always supplies various merchandises to the
country, and the landowners who reside in the city should always
receive there about a third of the produce of their land. The
country thus owes to the city more than half the produce of the
land. This debt would always exceed one half if all landowners
lived in the city, but as several of the least important live in
the country I suppose that the balance or debt which continually
returns from the country to the city is equal to half the produce
of the land and is paid in the city by half the products of the
country transported to it and sold to pay this debt.
But all the countryside of a state or kingdom owes a
constant balance to the capital, as well for the rents of the
more considerable landowners who reside there as for the taxes of
the state or crown, most of which are spent in the capital. All
the provincial cities owe a constant balance to the capital,
either for the state, upon houses or consumption, or for the
different commodities which they draw from the capital. It
happens also that several individuals and landowners who live in
the provincial cities go to spend some time in the capital, for
pleasure, or for the judgment of their lawsuits in final appeal,
or because they send their children thither for a fashionable
education. Consequently all these expenses incurred in the
capital are drawn from the provincial cities.
It may therefore be said that all the countryside and all
the cities of a state owe regularly and annually a balance or
debt to the capital. But as it is all paid in money it is evident
that the provinces always owe considerable sums to the capital;
for the products and commodities which the provinces send to the
capital are sold there for money, and with this money the debt or
balance in question is paid.
Suppose now that the circulation of money in the provinces
and in the capital is equal both in quantity of money and speed
of circulation. The balance will be first sent to the capital in
cash and this will diminish the quantity of money in the
provinces and increase it in the capital, and consequently the
raw material and commodities will be dearer in the capital than
in the provinces, on account of the greater abundance of money in
the capital. The difference of prices in the capital and in the
provinces must pay for the costs and risks of transport,
otherwise cash will be sent to the capital to pay the balance and
this will go on till the prices in the capital and the provinces
come to the level of these costs and risks. Then the merchants or
undertakers of the market towns will buy at a low price the
products of the villages and will have them carried to the
capital to be sold there at a higher price: and this difference
of price will necessarily pay for the upkeep of the horses and
menservants and the profit of the undertaker, or else he would
cease his enterprise.
It will follow from this that the price of raw produce of
equal quality will always be higher in the country places which
are nearest the capital than in those more distant in proportion
to the costs and risks of transport; and that the countries
adjacent to seas and rivers flowing into the capital will get a
better price for their produce in proportion than those which are
distant (other things being equal) because water transport is
less expensive than land transport. On the other hand the
products and small wares which cannot be consumed in the capital,
because they are not suitable or cannot be sent thither on
account of their bulk, or because they would be spoiled on the
way, will be infinitely cheaper in the country and distant
provinces than in the capital, owing to the amount of money
circulating for them which is much smaller in the distant
provinces.
So it is that new laid eggs, game, fresh butter, wood
fuel, etc. will generally be much cheaper in the district of
Poitou, whilst corn, cattle and horses will be dearer at Paris
only by the difference of the cost and risk of carriage and the
dues for entering the city.
It would be easy to make an infinite number of inductions
of the same kind to justify by experience the necessity of an
inequality in the circulation of money in the different provinces
of a great state or kingdom, and to show that this inequality is
always relative to the balance or debt which belongs to the
capital.
If we suppose that the balance due to the capital amounts
to one fourth of the produce of the land of all the provinces of
the state the best use that can be made of the land would be to
employ the country bordering on the capital to produce the kinds
of produce which could not be drawn from distant provinces
without much expense or deterioration. This is in fact what
always takes place. The market prices of the capital serving as a
standard for the farmers to employ the land for such or such a
purpose they use the nearest, when suitable, for market gardens,
pasture, etc.
So far as possible manufactures of cloth, linen, lace,
etc. ought to be set up in the remote provinces; and, in the
neighbourhood of coal mines or forest, which are useless by their
distance, manufactures of tools of iron, tin, copper, etc. In
this way finished manufactures could be sent to the capital with
much less cost of carriage than the raw materials to be worked up
in the capital and the subsistence of the artisans who would work
upon them there. This would save a quantity of horses and
waggoners who would be better employed for the benefit of the
state. The land would serve to maintain on the spot workmen and
useful mechanics; and a multitude of horses would be saved who
serve only upon unnecessary transport. In this way the distant
lands would yield higher rents to the proprietors and the
inequality of the circulation of the provinces and the capital
would be better proportioned and less considerable.
Nevertheless to set up manufactures in this way would
need not only much encouragement and capital but also some way to
ensure a regular and constant demand, either in the capital
itself or in foreign countries, whose exports in return may be of
service to the capital, to pay for the merchandise which it draws
from these foreign countries or for the return of silver in kind.
When these manufactures are set up perfection is not at
once attained. If some other province have them better or cheaper
or owing to the vicinity of the capital or the convenience of a
sea or river communication have their transport considerably
facilitated, the manufactures in question will have no success.
All these circumstances have to be considered in setting up a
manufactory. I have not proposed to treat of them in this essay,
but only to suggest that so far as practicable manufactures
should be set up in provinces distant from the capital, to render
them more considerable and to bring about there a circulation of
money less disproportionate to that of the capital.
For when a distant province has no manufactory and
produces only ordinary raw materials without water communication
with the capital or the ocean, it is astonishing how scarce money
is there compared with that which circulates in the capital and
how little the best lands produce to the prince and to the
proprietors who reside in the capital.
The wines of Provence and of Languedoc sent to the north
round the Straits of Gibraltar by long and difficult navigation,
after having passed through the hands of several dealers yield
very little to the Paris owners of the land.
It is however necessary that these distant provinces
should send their produce, in spite of all the drawbacks of
transport and distance to the capital or elsewhere either in the
state or in foreign countries in order that the returns should
provide for payment of the balance due to the capital. But these
products would be mostly consumed on the spot if there were works
or factories to pay this balance, in which case the number of
inhabitants would be much larger.
When the province pays the balance only with its produce
which yields so little in the capital having regard to the
expenses of distance, it is evident that the proprietor living in
the capital pays the produce of much land in the country to
receive little in the capital. This arises from the inequality of
money, and this inequality is owing to the constant balance due
from the province to the capital.
At present if a state or kingdom which supplies all
foreign countries with work of its own manufacture does so much
of this commerce that it draws every year a constant balance of
money from abroad, the circulation will become more considerable
there than in foreign countries, money will be more plentiful
there, and consequently land and labour will gradually become
dearer there. It will follow that in all the branches of commerce
the state in question will exchange a smaller amount of land and
labour with the foreigner for a larger amount, so long as these
circumstances continue.
But if some foreigner reside in the state in question he
will be in about the same situation and circumstances as the
proprietor at Paris who has his land in distant provinces.
France, since the erection in 1646 of manufactories of
cloth and other works since set up, appeared to trade, at least
in part, in the way described. Since the decay of France, England
has taken possession of this trade; and all states appear
flourishing only by the larger or smaller part they have in it.
The inequality of the circulation of money in the different
states constitutes the inequality of their respective power,
other things being equal; and this inequality of circulation is
always respective to the balance of foreign trade.
It is easy to judge from what has been said in this
chapter that the assessment by taxes of the royal tithe, made by
Mr de Vauban, would be neither advantageous nor practicable. If
the taxes on land were levied in money proportionable to the
rents of the proprietors, it would be fairer. But I must not
wander from my subject to show the inconvenience and
impossibility of Mr de Vauban's proposal.
Chapter Six
Of the increase and decrease in the quantity of hard money in
a State
If mines of gold or silver be found in a state and
considerable quantities of minerals drawn from them, the
proprietors of these mines, the undertaker, and all those who
work there, will not fail to increase their expenses in
proportion to the wealth and profit they make: they will also
lend at interest the sums of money which they have over and above
what they need to spend.
All this money, whether lent or spent, will enter into
circulation and will not fail to raise the price of products and
merchandise in all the channels of circulation which it enters.
Increased money will bring about increased expenditure and this
will cause an increase of market prices in the highest years of
exchange and gradually in the lowest.
Everybody agrees that the abundance of money or its
increase in exchange, raises the price of everything. The
quantity of money brought from American to Europe for the last
two centuries justifies this truth by experience.
Mr Locke lays it down as a fundamental maxim that the
quantity of produce and merchandise in proportion to the quantity
of money serves as the regulator of market price. I have tried to
elucidate his idea in the preceding chapters: he has clearly seen
that the abundance of money makes everything dear, but he has not
considered how it does so. The great difficulty of this question
consists in knowing in what way and in what proportion the
increase of money raises prices.
I have already remarked that an acceleration or greater
rapidity in circulation of money in exchange, is equivalent to an
increase of actual money up to a point. I have also observed that
the increase or decrease of prices in a distant market, home or
foreign, influences the actual market prices. On the other hand
money flows in detail through so many channels that it seems
impossible not to lose sight of it seeing that having been
amassed to make large sums it is distributed in little rills of
exchange, and then gradually accumulated again to make large
payments. For these operations it is constantly necessary to
change coins of gold, silver and copper according to the activity
of exchange. It is also usually the case that the increase or
decrease of actual money in a state is not perceived because it
flow abroad, or is brought into the state, by such imperceptible
means and proportions that it is impossible to know exactly the
quantity which enters or leaves the state.
However all these operations pass under our eyes and
everybody takes part in them. I may therefore venture to offer a
few observations on the subject, even though I may not be able to
give an account which is exact and precise.
I consider in general that an increase of actual money
causes in a state a corresponding increase of consumption which
gradually brings about increased prices.
If the increase of actual money comes from mines of gold
or silver in the state the owner of these mines, the adventurers,
the smelters, refiners, and all the other workers will increase
their expenses in proportion to their gains. They will consume in
their households more meat, wine, or beer than before, will
accustom themselves to wear better cloths, finer linen, to have
better furnished houses and other choicer commodities. They will
consequently give employment to several mechanics who had not so
much to do before and who for the same reason will increase their
expenses: all this increase of expense in meat, wine, wool, etc.
diminishes of necessity the share of the other inhabitants of the
state who do not participate at first in the wealth of the mines
in question. The altercations of the market, or the demand for
meat, wine, wool, etc. being more intense than usual, will not
fail to raise their prices. These high prices will determine the
farmers to employ more land to produce them in another year:
these same farmers will profit by this rise of prices and will
increase the expenditure of their families like the others. Those
then who will suffer from this dearness and increased consumption
will be first of all the landowners, during the term of their
leases, then their domestic servants and all the workmen or fixed
wage-earners who support their families on their wages. All these
must diminish their expenditure in proportion to the new
consumption, which will compel a large number of them to emigrate
to seek a living elsewhere. The landowners will dismiss many of
them, and the rest will demand an increase of wages to enable
them to live as before. It is thus, approximately, that a
considerable increase of money from the mines increases
consumption, and by diminishing the number of inhabitants entails
a greater expense among those who remain.
If more money continues to be drawn from the mines all
prices will owing to this abundance rise to such a point that not
only will the landowners raise their rents considerably when the
leases expire and resume their old style of living, increasing
proportionably the wages their servants, but the mechanics and
workmen will raise the prices of their articles so high that
there will be a considerable profit in buying them from the
foreigner who makes them much more cheaply. This will naturally
induce several people to import many articles made in foreign
countries, where found very cheap: this will gradually ruin the
mechanics and manufacturers of the state who will not be maintain
themselves there by working at such low owing to the dearness of
living.
When the excessive has diminished the inhabitants of a
state, those who remain to a too large expenditure, raised
produce of the land and the labour of workmen to excessive
prices, ruined the manufactures of the state by use of foreign
productions on the part of landlords and mine workers, the money
produced by the mines will necessarily go abroad to pay for the
imports: this will gradually impoverish the state and render it
in some sort dependent on the Foreigner to whom it is obliged to
send money every year as it is drawn from the mines. The great
circulation of money, which was general at the beginning, ceases:
poverty and misery follow and the labour of the mines appears to
be only to the advantage of those employed upon them and the
Foreigners who profit thereby.
This is approximately what has happened to Spain since the
discovery of the Indies. As to the Portuguese, since the
discovery of the gold mines of Brazil, they have nearly always
made use of foreign articles and manufactures; and it seems that
they work at the mines only for the account and advantage of
foreigners. All the gold and silver which these two states
extract from the mines does not supply them in circulation with
more precious metal than others. England and France have even
more as a rule.
Now if the increase of money in the state proceeds from a
balance of foreign trade (i.e. from sending abroad articles and
manufactures in greater value and quantity than is imported and
consequently receiving the surplus in money) this annual increase
of money will enrich a great number of merchants and Undertakers
in the state, and will give employment to numerous mechanics and
workmen who furnish the commodities sent to the foreigner from
whom the money is drawn. This will increase gradually the
consumption of these industrial inhabitants and will raise the
price of land and labour. But the industrious who are eager to
acquire property will not at first increase their expense: they
will wait till they have accumulated a good sum from which they
can draw an assured interest, independently of their trade. When
a large number of the inhabitants have acquired considerable
fortunes from this money, which enters the state regularly and
annually, they will, without fail, increase their consumption and
raise the price of everything. Though this dearness involves them
in a greater expense than they at first contemplated they will
for the most part continue so long as their capital lasts; for
nothing is easier or more agreeable than to increase the family
expenses, nothing more difficult or disagreeable than to retrench
them.
If an annual and continuous balance has brought about in a
state a considerable increase of money it will not fail to
increase consumption, to raise the price of evening and even to
diminish the number of inhabitants unless additional produce is
drawn from abroad proportionable to the increased consumption.
Moreover it is usual in states which have acquired a considerable
abundance of money to draw many things from neighbouring
countries where money is rare and consequently everything is
cheap: but as money must be sent for this the balance of trade
will become smaller. The cheapness of land and labour in the
foreign countries where money is rare will naturally cause the
erection of manufactories and works similar to those of the
state, but which will not at first be so perfect nor so highly
valued.
In this situation the state may subsist in abundance of
money, consume all its own produce and also much foreign produce
and over and above all this maintain a small balance of trade
against the foreigner or at least keep the balance level for many
years, that is import in exchange for its work and manufactures
as much money from these foreign countries as it has to send them
for the commodities or products of the land it takes from them.
If the state is a maritime state the facility and cheapness of
its shipping for the transport of its work and manufactures into
foreign countries may compensate in some sort the high price of
labour caused by the too great abundance of money; so that the
work and manufactures of this state, dear though they be, will
sell in foreign countries cheaper sometimes than the manufactures
of another state where labour is less highly paid.
The cost of transport increases a good deal the prices of
things sent to distant countries; but these costs are very
moderate in maritime states, where there is regular shipping to
all foreign ports so that Ships are nearly always found there
ready to sail which take on board all cargoes confided to them at
a very reasonable freight.
It is not so in states where navigation does not Nourish.
There it is necessary to build ships expressly for the carrying
trade and this sometimes absorbs all the profit; and navigation
there is always very expensive, which entirely discourages trade.
England today consumes not only the greatest part of its
own small produce but also much foreign produce, such as Silks,
Wines, Fruit, Linen in great quantity, etc. while she sends
abroad only the produce of her mines, her work and manufactures
for the most part, and dear though labour be owing to the
abundance of money, she does not fail to sell her articles in
distant countries, owing to the advantage of her shipping, at
prices as reasonable as in France where these same articles are
much cheaper.
The increased quantity of money in circulation in a state
may also be caused, without balance of trade, by subsidies paid
to this state by foreign powers, by the expenses of several
ambassadors, or of travellers whom political reasons or curiosity
or pleasure may induce to reside there for some time, by the
transfer of the property and fortune of some Families who from
motives of religious liberty or other causes quit their own
country to settle down in this state. In all these cases the sums
which come into the state always cause an increased expense and
consumption there and consequently raise the prices of all things
in the channels of exchange into which money enters.
Suppose a quarter of the inhabitants of the state consume
daily meat, wine, beer, etc. and supply themselves frequency with
cloths, linen, etc. before the increase in money, but that after
the increase a third or half of the inhabitants consume these
same things, the prices of them will not fail to rise, and the
dearness of meat will induce several of those who formed a
quarter of the state to consume less of it than usual. A man who
eats three pounds of meat a day will manage with two pounds, but
he feels the reduction, while the other half of the inhabitants
who ate hardly any meat will not feel the reduction. Bread will
in truth go up gradually because of this increased consumption,
as I have often suggested, but it will be less dear in proportion
than meat. The increased price of meat causes diminished
consumption on the part of a small section of the people, and so
is felt; but the of a small section of the people, and so is
felt; but the increased price of bread diminishes the share of
all the inhabitants, and so is less felt. If 100,000 extra people
come to live in a state of 10 millions of inhabitants, their
extra consumption of bread will amount to only pound in 100 which
must be subtracted from the old inhabitants; but when a man
instead of 100 pounds of bread consumes 99 for his subsistence he
hardly feels this reduction.
When the consumption of meat increases the farmers add to
their pastures to get more meat, and this diminishes the arable
land and consequently the amount of corn. But what generally
causes meat to become dearer in proportion than Bread is that
ordinarily the free import of foreign corn is permitted while the
import of Cattle is absolutely forbidden, as in England, or heavy
import duties are imposed as in other states. This is the reason
why the rents of meadows and pastures go up in England, in the
abundance of money, to three times more than the rents of arable
land.
There is no doubt that Ambassadors, Travellers, and
Families who come to settle in the state, increase consumption
there and that prices rise in all the channels of exchange where
money is introduced.
As to subsidies which the state has received from foreign
powers, either they are hoarded for state necessities or are put
into circulation. If we suppose them hoarded they do not concern
my argument for I am considering only money in circulation.
Hoarded money, plate, Church treasures, etc. are wealth which the
state turns to service in extremity, but are of no present
utility. If the state puts into circulation the subsidies in
question it can only be by spending them and this ill very
certainly increase consumption and send up all prices. Whoever
receives this money will set it in motion in the principal affair
of life, which is the food, either of himself or of some other,
since to this everything corresponds directly or indirectly.
Chapter Seven
Continuation of the same subject
As gold, silver, and copper have an intrinsic value
proportionable to the land and labour which enter into their
production at the mines added to the cost of their importation or
introduction into states which have no mines, the quantity of
money, as of all other commodities, determines its value in the
bargaining of the market against other things.
If England begins for the first time to make use of gold,
silver, and copper in exchanges money will be valued according to
the quantity of it in circulation proportionably to its power of
exchange against all other merchandise and produce, and their
value will be arrived at roughly by the altercations of the
markets. On the footing of this estimation the landowners and
Undertakers will fix the wages of their Domestic Servants and
Workmen at so much a day or a year, so that they and their
families may be able to live on the wages they receive.
Suppose now that the residence of Ambassadors and foreign
travellers in England have introduced as much money into the
circulation there as there was before; this money will at first
pass into the hands of various mechanics, Domestic Servants,
Undertakers and others who have had a share in providing the
equipages, amusements, etc. of these Foreigners; the
manufacturers, farmers, and other Undertakers will feel the
effect of this increase of money which will habituate a great
number of people to a larger expense than before, and this will
in consequence send up market prices. Even the children of these
Undertakers and mechanics will embark upon new expense: in this
abundance of money their Fathers will give them a little money
for their petty pleasures, and with this they will buy cakes and
patties, and this new quantity of money will spread itself in
such a way that many who lived without handling money will now
have some. Many purchases which used to be made on credit will
now be made for cash, and there will therefore be greater
rapidity in the circulation of money in England than there was
before.
From all this I conclude that by doubling the quantity of
money in a state the prices of products and merchandise are not
always doubled. A River which runs and winds about in its bed
will not flow with double the speed when the amount of its water
is doubled.
The proportion of the dearness which the increased
quantity of money brings about in the state will depend on the
turn which this money will impart to consumption and circulation.
Through whatever hands the money which is introduced may pass it
will naturally increase the consumption; but this consumption
will be more or less great according to circumstances. It will be
directed more or less to certain kinds of products or merchandise
according to the idea of those who acquire the money. Market
prices will rise more for certain things than for others however
abundant the money may be. In England the price of meat might be
tripled while the price of corn went up only one fourth.
In England it is always permitted to bring in corn from
foreign countries, but not cattle. For this reason however great
the increase of hard money may be in England the price of corn
can only be raised above the price in other countries where money
is scarce by the cost and risks of importing corn from these
foreign countries.
It is not the same with the price of Cattle, which will
necessarily be proportioned to the quantity of money offered for
meat in proportion to the quantity of meat and the number of
Cattle bred there.
An ox weighing 800 pounds sells in Poland and Hungary for
two or three ounces of silver, but commonly sells in the London
market for more than 40. Yet the bushel of flour does not sell in
London for double the price in Poland and Hungary.
Increase of money only increases the price of products and
merchandise by the difference of the cost of transport, when this
transport is allowed. But in many cases the carriage would cost
more than the thing is worth, and so timber is useless in many
places. This cost of carriage is the reason why milk, fresh
butter, salads, game, etc. are almost given away in the provinces
distant from the capital.
I conclude that an increase of money circulating in a
state always causes there an increase of consumption and a higher
standard of expense. But the dearness caused by this money does
not affect equally all the kinds of products and merchandise,
proportionably to the quantity of money, unless what is added
continues in the same circulation as the money before, that is to
say unless those who offer in the market one ounce of silver be
the same and only ones who now offer two ounces when the amount
of money in circulation is doubled in quantity, and that is
hardly ever the case. I conceive that when a large surplus of
money is brought into a state the new money gives a new turn to
consumption and even a new speed to circulation. But it is not
possible to say exactly to what extent.
Chapter Eight
Further Reflections on the same subject
We have seen that the quantity of money circulating in a
state may be increased by working the mines which are found in
it, by subsidies from foreign powers, by the immigration of
Families of foreigners, by the residence of Ambassadors and
Travellers, but above all by a regular and annual balance of
trade from supplying merchandise to Foreigners and drawing from
them at least part of the price in gold and silver. It is by this
last means that a state grows most substantially, especially when
its trade is accompanied and supported by ample navigation and by
a considerable raw produce at home supplying the material
necessary for the goods and manufactures sent abroad.
As however the continuation of this Commerce gradually
introduces a great abundance of money and little by little
increases consumption, and as to meet this much Foreign produce
must be brought in, part of the annual balance goes out to pay
for it. On the other hand the habit of spending increasing the
employment of labourers the prices of manufactured goods always
go up. Without fail some foreign countries endeavour to set up
for themselves the same kinds of manufactures, and so cease to
buy those of the state in question; and though these new
establishments of crafts and manufactures be not at first perfect
they slacken and even prevent the exportation of those of the
neighbouring state into their own country where they can be got
cheaper.
Thus it is that the state begins to lose some branches of
its profitable trade: and many of its workmen and mechanics who
see labour Fallen off leave the state to find more work in the
countries with the new manufacture. In spite of this diminution
in the balance of trade the custom of importing various products
will continue. The articles and manufactures of the state having
a great reputation, and the facility of navigation affording the
means of sending them at little cost into distant countries, the
state will for many years keep the upper hand over the new
manufactures of which we have spoken and will still maintain a
small Balance of trade, or at least will keep it even. If however
some other maritime state tries to perfect the same articles and
its navigation at the same time it will owing to the cheapness of
its manufactures take away several branches of trade from the
state in question. In consequence this state will begin to lose
its balance of trade and will be forced to send every year a part
of its money abroad to pay for its importations.
Moreover, even if the state in question could keep a
balance of trade in its greater abundance of money it is
reasonable to suppose that this abundance will not arrive without
many wealthy individuals springing up who will plunge into
luxury. They will buy pictures and gems from the foreigner, will
procure their silks and rare objects, and set such an example of
luxury in the state that in spite of the advantage of its
ordinary trade its money will flow abroad annually to pay for
this luxury. This will gradually impoverish the state and cause
it to pass from great power into great weakness.
When a state has arrived at the highest point of wealth (I
assume always that the comparative wealth of states consists
principally in the respective quantities of money which they
possess) it will inevitably fall into poverty by the ordinary
course of things. The too great abundance of money, which so long
as it lasts forms the power of states, throws them back
imperceptibly but naturally into poverty. Thus it would seem that
when a state expands by trade and the abundance of money raises
the price of land and labour, the Prince or the Legislator ought
to withdraw money from circulation, keep it for emergencies, and
try to retard its circulation by every means except compulsion
and bad faith, so as to forestall the too great dearness of its
articles and prevent the drawbacks of luxury.
But as it is not easy to discover the time opportune for
this, nor to know when money has become more abundant than it
ought to be for the good and preservation of the advantages of
the state, the Princes and Heads of Republics, who do not concern
themselves much with this sort of knowledge, attach themselves
only to make use of the facility which they find through the
abundance of their state revenues, to extend their power and to
insult other countries on the most frivolous pretexts. And all
things considered they do not perhaps so badly in working to
perpetuate the glory of their reigns and administrations, and to
leave monuments of their power and wealth; for since, according
to the natural course of humanity, the state must collapse of
itself they do but accelerate its fall a little. Nevertheless it
seems that they ought to endeavour to make their power last all
the time of their own administration.
It does not need a great many years to raise abundance to
the highest point in a state, still fewer are needed to bring it
to poverty for lack of commerce and manufactures. Not to speak of
the power and fall of the Republic of Venice, the Hanseatic
Towns, Flanders and Brabant, the Dutch Republic, etc. who have
succeeded each other in the profitable branches of trade, one may
say that the power of France has been on the increase only from
1646 (when manufactures of cloths were set up there, which were
until then imported) to 1684 when a number of Protestant
Undertakers and artisans were driven out of it, and that kingdom
has done nothing but recede since this last date.
To judge of the abundance and scarcity of money in
circulation. I know no better measure than the leases and rents
of landowners. When land is let at high rents it is a sign that
there is plenty of money in the state; but when land has to be
let much lower it shows, other things being equal, that money is
scarce. I have read in an Etat de la France that the acre of
vineyard which was let in 1660 near Mantes, and therefore not far
from the capital of France, for 200 livres tournois in money of
full weight, only let in 1700 for 100 livres tournois in lighter
money, though the silver brought from the West Indies in the
interval should naturally have sent up the price of land in
Europe.
The author [of the Etat] attributes this fall in rent to
defective consumption. And it seems that he had in fact observed
that the consumption of Wine had diminished. But I think he has
mistaken the effect for the cause. The cause was a greater rarity
of money in France, and the effect of this was naturally a
falling off in consumption. In this Essay I have always
suggested, on the contrary, that abundant money naturally
increases consumption and contributes above everything to the
cultivation of land. When abundant money raises produce to
respectable prices the inhabitants make haste to work to acquire
it; but they are not in the same hurry to acquire produce or
merchandise beyond what is needed for their maintenance.
It is clear that every state which has more money in
circulation than its neighbours has an advantage over them so
long as it maintains this abundance of money.
In the first place in all branches of trade it gives less
land and labour than it receives: the price of land and labour
being everywhere reckoned in money is higher in the state where
money is most abundant. Thus the state in question receives
sometimes the produce of two acres of land in exchange for that
of one acre, and the work of two men for that of only one. It is
because of this abundance of money in circulation in London that
the work of one English embroiderer costs more than that of 10
Chinese embroiderers, though the Chinese embroider much better
and turn out more work in a day. In Europe one is astonished how
these Indians can live, working so cheap, and how the admirable
stuffs which they send us cost so little.
In the second place, the revenues of the state where money
abounds, are raised more easily and in comparatively much larger
amount. This gives the state, in case of war or dispute, the
means to gain all sorts of advantages over its adversaries with
whom money is scarce.
If of two Princes who war upon each other for the
sovereignty or conquest of a state one have much money and the
other little money but many estates which may be worth twice as
much as all the money of his enemy, the first will be better able
to attach to himself Generals and Officers by gifts of money than
the second will be by giving twice the value in lands and
estates. Grants of land are subject to challenge and revocation
and cannot be relied upon so well as the money which is received.
With money munitions of war and food are bought even from the
enemies of the state. Money can be given without witnesses for
secret service. Lands, Produce, merchandise would not serve for
these purposes, not even jewels or diamonds, because they are
easily recognised. After all it seems to me that the comparative
power and wealth of states consist, other things being equal, in
the greater or less abundance of money circulating in them hic et
nunc.
It remains to mention two other methods of increasing the
amount of money in active circulation in a state The first is
when Undertakers and private individual borrow money from their
foreign correspondents a interest, or individuals abroad send
their money into the state to buy shares or government stocks
there. This often amounts to very considerable sums upon which
the state must annually pay interest to these foreigners These
methods of increasing the money in the state make it more
abundant there and diminish the rate of interest. By means of
this money the Undertakers in the state find it possible to
borrow more cheaply to set people on work and to establish
manufactories in the hope of profit. The Artisans and all those
through whose hands this money passes, consume more than they
would have done if they had not been employed by means of this
money, which consequently increases prices just as if it belonged
to the state, and through the increased consumption or expense
thus caused the public revenues derived from taxes on consumption
are augmented. Sums lent to the state in this way bring with them
many present advantages, but the end of them is always burdensome
and harmful. The state must pay the interest to the foreigners
every year, and besides this is at the mercy of the foreigners
who can always put it into difficulty when they take it into
their heads to withdraw their capital. It will certainly arrive
that they will want to withdraw it at the moment when the state
has most need of it, as when preparations for war are in hand and
a hitch is feared. The interest paid to the foreigner is always
much more considerable than the increase of pubic revenue which
his money occasions. These loans of money are often seen to pass
from one country to another according to the confidence of
investors in the states to which they are sent. But to tell the
truth it most commonly happens that states loaded with these
loans, who have paid heavy interest on them for many years, fall
at length by bankruptcy into inability to pay the capital. As
soon as distrust is awakened the shares or public stocks fall,
the foreign shareholders do not like to realise them at a loss
and prefer to content themselves with the interest, hoping that
confidence will revive. But sometimes it never revives. In states
which decline into decay the principal object of ministers is
usually to restore confidence and so attract foreign money by
loans of this kind. For unless the ministry fails to keep faith
and to observe its engagements the money of the subjects will
circulate without interruption. It is the money of the foreigners
which has the power of increasing the circulating currency in the
state.
But the resource of these borrowings which gives a present
ease comes to a bad end and is a fire of straw. To revive a state
it is needful to have a care to bring about the influx of an
annual, a constant and a real balance of trade, to make
flourishing by Navigation the articles and manufactures which can
always be sent abroad cheaper when the state is in a low
condition and has a shortage of money. Merchants are first to
begin to make their fortunes, then the lawyers may get part of
it, the Prince and the farmers of the revenue get a share at the
expense of these, and distribute their graces as they please.
When money becomes too plentiful in the state, luxury will instal
itself and the state will fall into decay.
Such is approximately the circle which may be run by a
considerable state which has both capital and industrious
inhabitants. An able minister is always able to make it
recommence this round. Not many years are needed to see it tried
and succeed, at least at the beginning which is its most
interesting position. The increased quantity of money in
circulation will be perceived in several ways which my argument
does not allow me to examine now.
As for states which have not much capital and can only
increase by accidents and conjuncture it is difficult to find
means to make them flourish by trade. No ministers can restore
the Republics of Venice and Holland to the brilliant situation
from which they have fallen. But as to Italy, Spain, France, and
England, however low they may be fallen, they are always capable
of being raised by good administration to a high degree of power
by trade alone, provided it be undertaken separately, for if all
these states were equally well administered they would be great
only in proportion to their respective capital and to the greater
or less industry of their people.
The last method I can think of to increase the quantity of
money actually circulating in a state is by violence and arms and
this is often blended with the others, since in all Treaties of
Peace it is generally provided to retain the trading rights and
privileges which it has been possible to derive from them. When a
state exacts contributions or makes several other states
tributary to it, this is a very sure method of obtaining their
money. I will not undertake to examine the methods of putting
this device into practice, but will content myself with saying
that all the nations who have flourished in this way have not
failed to decline, like states who have nourished through their
trade. The ancient Romans were more powerful in this wise than
all the other peoples we know of. Yet these same Romans before
losing an inch of the land of their vast states fell into decline
by luxury and brought themselves low by the diminution of the
money which had circulated among them, but which luxury caused to
pass from their great Empire into oriental countries.
So long as the luxury of the Romans (which did not begin
till after the defeat of Antiochus, King of Asia about A.U.C.
564) was confined to the produce of the land and labour of all
the vast estates of their dominion, the circulation of money
increased instead of diminishing. The public was in possession of
all the mines of gold, silver, and copper in the Empire. They had
the gold mines of Asia, Macedonia, Aquilaea and the rich mines
both of gold and silver of Spain and other countries. They had
several mints where gold, silver and copper coins were struck.
The consumption at Rome of all the articles and merchandise which
they drew from their vast Provinces did not diminish the
circulation of the currency, any more than pictures, statues and
jewels which they drew from them. Though the patricians laid out
excessive amounts for their feasts and paid 15,000 ounces of
silver for a single fish, all that did not diminish the quantity
of money circulating in Rome, seeing that the tribute of the
Provinces regularly brought it back, to say nothing of what
Praetors and Governors brought thither by their extortions. The
amounts annually extracted from the mines merely increased the
circulation at Rome during the whole reign of Augustus. Luxury
was however already on a very great scale, and there was much
eagerness not only for curiosities produced in the Empire but
also for jewels from India, pepper and spices, and all the
rarities of Arabia, and the silks which were not made with raw
materials of the Empire began to be in demand there. The money
drawn from the mines still exceeded however the sums sent out of
the Empire to buy all these things. Nevertheless under Tiberius a
scarcity of money was felt. That Emperor had shut up in his
Treasury 2 milliards and 700 millions of sesterces. To restore
abundance of circulation he had only to borrow 300 millions on
the mortgage of his estates. Caligula in less than one year spent
all this treasure of Tibetius after his death, and it was then
that the abundance of money in circulation was at its highest in
Rome. The fury of luxury kept on increasing. In the time of
Pliny, the historian, there was exported from the Empire, as he
estimated, at least 100 millions of sesterces annually. This was
more than was drawn from the mines. Under Trajan the price of
land had fallen by one-third or more, according to the younger
Pliny, and money continued to decrease until the time of the
Emperor Septimus Severus. It was then so scarce at Rome that the
Emperor made enormous granaries, being unable to collect large
treasure for his enterprises. Thus the Roman Empire fell into
decline through the loss of its money before losing any of its
estates. Behold what luxury brought about and what it always will
bring about in similar circumstances.
Chapter 9
Of the Interest of Money and its Causes
Just as the prices of things are fixed in the altercations
of the market by the quantity of things offered for sale in
proportion to the quantity of money offered for them, or, what
comes to the same thing, by the proportionate number of sellers
and buyers, so in the same way the interest of money in a state
is settled by the proportionate number of lenders and borrowers.
Though money passes for a pledge in exchange it does not
multiply itself or beget an interest in simple circulation. The
needs of man seem to have introduced the usage of interest. A man
who lends his money on good security or on mortgage runs at least
the risk of the ill will of the borrower, or of expenses,
lawsuits and losses. But when he lends without security he runs
the risk of losing everything. For this reason needy men must in
the beginning have tempted lenders by the bait of a profit. And
this profit must have been proportionate to the needs of the
borrowers and the fear and avarice of the lenders. This seems to
me the origin of interest. But its constant usage in states seems
based upon the profits which the Undertakers can make out of it.
The land naturally produces, aided by human labour, 4, 10,
20, 50, 100, 150 times the amount of corn sown upon it, according
to the fertility of the soil and the industry of the inhabitants.
It multiplies fruits and cattle. The farmer who conducts the
working of it has generally two thirds of the produce, one third
pays his expenses and upkeep, the other remains for the profit of
his enterprise.
If the farmer have enough capital to carry on his
enterprise, if he have the needful tools horses for ploughing,
cattle to make the land he will take for himself after paying all
expense of the produce of his farm. But if a competent labourer
who lives from day to day on his wages and has no capital, can
find some one willing to lend him land or money buy some, he will
be able to give the lender all the third rent, or third part of
the produce of a farm of which he will become the farmer or
Undertaker. However he will think his position improved since he
will find in the second rent and will become master instead man.
If by great economy and pinching himself somewhat of his
necessities he can gradually accumulate some little capital, he
will have every year less to borrow, and will at last arrive at
keeping the whole of his third rent.
If this new Undertaker finds means to buy corn or cattle on
credit, to be paid off at a long date when he can make money by
the sale of his farm produce, he will gladly pay more than the
market price for ready money. The result will be the same as if
he borrowed cash to buy corn for ready money, paying as interest
the difference between the cash price and the price payable at a
future date. But whether he borrow cash or goods there must be
enough left to him for upkeep or he will become bankrupt. The
risk of this is the reason why he will be required to pay 20 or
30 per cent profit or interest on the amount of money or value of
the produce or merchandise lent to him.
Again, a master hatter who has capital to carry on his
manufacture of hats, either to rent a house, buy beaver, wool,
dye, etc. or to pay for the subsistence of his workmen every
week, ought not only to find his upkeep in this enterprise, but
also a profit like that of the farmer who has his third part for
himself. This upkeep and the profit should come from the sale of
the hats whose price ought to cover not only the materials but
also the upkeep of the hatter and his workmen and also the profit
in question.
But a capable journeyman hatter with no capital may
undertake the same manufacture by borrowing money and materials
and abandoning the profit to anybody who is willing to lend him
the money or entrust him with the beaver, wool, etc. for which he
will pay only some time later when he has sold his hats. If when
his bills are due the lender requires his capital back, or if the
wool merchant and other lenders will not grant him further credit
he must give up his business, in which case he may prefer to go
bankrupt. But if he is prudent and industrious he may be able to
prove to his creditors that he has in cash or in hats about the
value of what he has borrowed and they will probably choose to
continue to give him credit and he satisfied for the present with
their interest or profit. In this way he will carry on and will
perhaps gradually save some capital by retrenching a little upon
his necessities. With the aid of this he will have every year
less to borrow, and when he has collected a capital sufficient to
conduct his manufacture, which will always be proportionable to
his sales, the profit will remain to him entirely and he will
grow rich if he does not increase his expenditure.
It is well to observe that the upkeep of such a
manufacturer is small compared with the sums he borrows in his
trade or with the materials entrusted to him, and therefore the
lenders run no great risk of losing their capital if he is
respectable and hard working: but as it is quite possible that he
is not so the lenders always require from him a profit or
interest of 20 to 30 per cent of the value of their loan. Even
then only those who have a good opinion of him will trust him.
The same inductions may be made with regard to all the masters,
artisans, manufacturers and other Undertakers in the state who
carry on enterprises in which the capital considerably carry on
enterprises in which the capital considerably exceeds the value
of their annual upkeep.
But if a water-carrier in Paris sets up as the Undertaker
of his own work, all the capital he needs will be the price of
two buckets which he can buy for an ounce of silver and then all
his gains are profit. If by his labour he gains 50 ounces of
silver a year, the amount of his capital or borrowing will be to
that of his profit as 1 to 50. That is he will gain 5000 per cent
while the hatter will gain only 50 per cent and will also have to
pay 20 or 30 per cent to the lender.
Nevertheless a money lender will prefer to lend 1000 ounces
of silver to a hatmaker at 20 per cent interest rather than to
lend 1000 ounces to 1000 water carriers at 500 per cent interest.
The water carriers will quickly spend on their maintenance not
only the money they gain by their daily labour but all that which
is lent to them. These capitals lent to them are small compared
with what they need for their maintenance: whether they be much
or little employed they can easily spend all they earn. Therefore
it is hardly possible to arrive at the profits of these little
undertakers. It might well be that a water carrier gains 5000 per
cent of the value of the buckets which serve as his capital, even
10,000 per cent if by hard work he gains 100 ounces of silver a
year. But as he may spend on his living 100 ounces just as well
as 50, it is only by knowing what he devotes to his upkeep that
we can find how much he has of clear profit.
The subsistence and upkeep of Undertakers must always be
deducted before arriving at their profit. We have done this in
the example of the farmer and of the hatmaker, but it can hardly
be determined in the case of the petty Undertakers, who are for
the most part insolvent when they are in debt.
It is customary for the London brewers to lend a few
barrels of beer to the keepers of ale-houses, and when these pay
for the first barrels to continue to lend them more. If these
ale-houses do a brisk business the brewers sometimes make a
profit of 500 per cent per annum; and I have heard that the big
brewers grow rich when no more than half the ale-houses go
bankrupt upon them in the course of the year.
All the merchants in a state are in the habit of lending
merchandise or produce for a time to retailers, and proportion
the rate of their profit or interest to that of their risk. This
risk is always great because of the high proportion of the
borrower's upkeep to the loan. For if the borrower or retailer
have not a quick turnover in small business he will quickly go to
ruin and will spend all he has borrowed on his own subsistence
and will therefore be forced into bankruptcy.
The fishwives, who buy fish at Billingsgate in London to
sell again in the other quarters of the City, generally pay under
a contract made by an expert scrivener, one shilling per guinea,
or twenty-one shillings, interest per week, which amounts to 260
per cent per annum. The market-women at Paris, whose business is
smaller, pay 5 sols for the week's interest on an ecu of 3
livres, which exceeds 430 per cent per annum. And yet there are
few lenders who make a fortune from such high interest.
These high rates of interest are not only permitted but are
in a way useful and necessary in a state. Those who buy fish in
the streets pay these high interest charges in the increased
price. It suits them and they do not feel it. In like manner an
artisan who drinks a pot of beer and pays for it a price which
enables the brewer to get his 500 per cent profit, is satisfied
with this convenience and does not feel the loss in so small a
detail.
The Casuists, who seem hardly suitable people to judge the
nature of interest and of matters of trade, have invented a term,
damnum emergens, by whose aid they consent to tolerate these high
rates of interest; and rather than upset the custom and
convenience of society, they have agreed and allowed to those who
lend at great risk to exact in proportion a high rate of
interest: and this without limit, for they would be hard put to
it to find any certain limit since the business depends in
reality on the fears of the lenders and the needs of the
borrowers.
Maritime merchants are praised when they can make a profit
on their Adventures, even though it be 10,000 per cent; and
whatever profit wholesale merchants may make or stipulate for in
Selling on long credit produce or merchandise to smaller retail
merchants, I have not heard that the Casuists make it a crime.
They are or seem to be a little more scrupulous about loans in
hard cash though it is essentially the same thing. Yet they
tolerate even these loans by a distinction, lucrum cessans, which
they have invented. I understand this to mean that a man who has
been in the habit of making his money bring in 500 per cent in
his trade may demand this profit when he lends it to another.
Nothing is more amusing than the multitude of laws and canons
made in every age on the subject of the interest of money, always
by wiseacres who were hardly acquainted with trade and always
without effect.
From these examples and inductions it seems that there are
in a state many classes and channels of interest or profit, that
in the lowest classes interest is always highest in proportion to
the greater risk, and that it diminishes from class to class up
to the highest which is that of merchants who are rich and
reputed solvent. The interest demanded in this class is called
the current rate of interest in the state and differs little from
interest on the mortgage of land. The bill of a solvent and solid
merchant is as much esteemed, at least for a short date, as a
lien upon land, because the possibility of a lawsuit or a dispute
on this last makes up for the possibility of the bankruptcy of
the merchant.
If there were in a state no Undertakers who could make a
profit on the money or goods which they borrow, the use of
interest would probably be less frequent than it is. Only
extravagant and prodigal people would contract loans. But
accustomed as every one is to make use of Undertakers there is a
constant source for Loans and therefore for interest. They are
the Undertakers who cultivate the land and supply bread, meat,
clothes, etc. to all the inhabitants of a city. Those who work on
wages for these Undertakers seek also to set themselves up as
Undertakers, in emulation of each other. The multitude of
Undertakers is much greater among the Chinese, and as they all
have lively intelligence, a genius for enterprise, and great
perseverance in carrying it out, there are among them many
Undertakers who are among us people on fixed wages. They supply
labourers with meals, even in the fields. It is perhaps this
multitude of small Undertakers and others, from class to class,
who finding the means to gain a good deal by ministering to
consumption without its being felt by the consumers, keep up the
rate of interest in the highest class at 30 per cent while it
hardly exceeds 5 per cent in our Europe. At Athens in the time of
Solon interest was at 18 per cent. In the Roman Republic it was
most commonly 12 per cent, but has been known to be 48, 20, 8, 6,
and at the lowest 4 per cent. It was never so low in the free
market as towards the end of the Republic and under Augustus
after the conquest of Egypt. The Emperor Antoninus and Alexander
Severus only reduced interest to 4 per cent by lending public
money on the mortgage of land.
Chapter 10 and last
Of the Causes of the Increase and Decrease of the Interest of
Money in a State
It is a common idea, received of all those who have written
on trade, that the increased quantity of currency in a state
brings down the price of interest there, because when money is
plentiful it is more easy to find some to borrow. This idea is
not always true or accurate. For proof it needs only to be
recalled that in 1720, nearly all the money in England was
brought to London and over and above this the number of notes put
out accelerated the movement of money extraordinarily. Yet this
abundance of money and currency instead of lowering the current
rate of interest which was before at 5 per cent and under, served
only to increase the rate which was carried up to 50 and 60 per
cent. It is easy to account for this increased rate of interest
by the principles and the causes of interest laid down in the
previous chapter. The reason is that everybody had become an
undertaker in the South Sea scheme and wanted to borrow money to
buy shares, expecting to make an immense profit out which it
would be easy to pay this high rate of interest.
If the abundance of money in the state comes from the hands
of moneylenders it will doubtless bring down the current rate of
interest by increasing the number of money lenders: but if it
comes from the intervention of spenders it will have just the
opposite effect and will raise the rate of interest by increasing
the number of Undertakers who will have employment from this
increased expense, and will need to borrow to equip their
business in all classes of interest.
Plenty or scarcity of money in a state always raises or
lowers the price of everything in bargaining without any
necessary connection with the rate of interest, which may very
well be high in states where there is plenty of money and low in
those where money is scarcer: high where everything is dear, and
low where everything is cheap: high in London, low in Genoa.
The rate of interest rises and falls every day upon mere
rumours which tend to diminish or increase the security of
lenders, without the prices of things in exchange being affected
thereby.
The most regular cause of a high rate of interest in a
state is the great expense of nobles and landowners or other rich
people. Undertakers and master craftsmen are in the custom of
supplying the great houses in all their branches of expenditure.
These Undertakers have nearly always need to borrow money in
order to supply them: and when the nobility consume their
revenues in advance and borrow money they contribute doubly to
raise the rate of interest.
On the contrary when the nobility of the state live
economically and buy at first hand so far as they can, they get
through their servants many things without their passing through
the hands of Dealers, they diminish the profits and numbers of
the Undertakers in the state and therefore of borrowers as well
as the rate of interest, because this class of Undertakers
working on their own capital borrow the least they can, and
contenting themselves with small profits prevent those who have
no capital from embarking in these enterprises on borrowed money.
Such is today the position of the Republics of Genoa and Holland,
where interest is sometimes at 2 per cent or under in the highest
class, whilst in Germany, Poland, France, Spain, England and
other countries the easiness and expense of noblemen and
landowners always keep the Undertakers and master craftsmen of
the country accustomed to large profits enabling them to pay a
high rate of interest, which is higher still when they import
everything from abroad with attendant risk.
When the Prince or the state incurs heavy expense, such as
making war, the rate of interest is raised for two such as making
war, the rate of interest is raised for two reasons: the first is
that this multiplies the number of Undertakers by several new
large enterprises for war supplies, and so increases borrowing.
The second is because of the greater risk which war always
involves.
On the contrary when the war is over risk diminishes, the
number of Undertakers is lessened and war-contractors ceasing to
be so retrench their expenses and become lenders of the money
they have gained. If now the Prince or state offer to repay part
of the debt it will interest, and this will have considerably
reduce the rate of interest, and this will have a more assured
result if part of the debt can be really paid off without
borrowing elsewhere, because the repayments increase the number
of lenders in the highest class of interest which will affect all
the other classes.
When the plentifulness of money in the state is due to a
continuous Balance of trade, this money first passes through the
hands of Undertakers, and although it increases consumption it
does not fail to bring down the rate of interest, because most of
the Undertakers then acquire enough capital to carry on their
business without money, and even become lenders of the sums they
have gained beyond what they need to carry on their trade. If
there are not in the state a great number of noblemen and rich
people who spend heavily then the abundance of money will
certainly bring down the rate of interest, while increasing the
price of goods and merchandise in exchange. This is what usually
happens in Republics which have neither much capital nor
considerable landed property and grow rich merely by foreign
trade. But in states which have a large capital and great
landowners the money brought in by foreign trade increases their
rents, and enables them to incur heavy expenditure which
maintains several Undertakers and mechanics besides those who
trade with the foreigner. This always keeps interest at a high
rate in spite of the abundance of money.
When the nobility and landowners ruin themselves by
extravagances, the money lenders who have mortgages on their
lands often acquire the absolute ownership of them, and it may
well arrive in the state that the lenders are creditors for much
more money than there is circulating there, in which case one may
consider them as subaltern owners of the land and goods mortgaged
for their security. If not their capital will be lost by
bankruptcies.
In the same way one may consider the owners of shares and
public funds as subaltern owners of the revenues of the state
devoted to payment of their interest. But if the Legislature were
compelled by the necessities of the state to employ these
revenues for other purposes, the shareholders or owners of public
funds would lose everything without the money circulating in the
state being diminished on that account by a single liard.
If the Prince or administrators of the state wish to
regulate the current rate of interest by law, the regulation must
be fixed on the basis of the current market rate in the highest
class, or thereabout. Otherwise the law will be futile, because
the contracting parties, obedient to the force of competition or
the current price settled by the proportion of lenders to
borrowers, will make secret bargains, and this legal constraint
will only embarrass trade and raise the rate of interest instead
of settling it. The Romans of old after several laws to restrict
interest passed one to forbid altogether the lending of money.
This law had no more success than its predecessors. The law of
Justinian to restrain patricians from taking more than 4 per
cent, those of a lower order 6 per cent, and traders 8 per cent
was equally amusing and unjust, whilst it was not forbidden to
make 50 and 100 per cent profit in all sorts of business.
If it is allowable and respectable for a landlord to let a
farm to a poor farmer at a high rental, risking the loss of the
rent of a whole year, it seems that it should be permissible to a
lender to advance his money to a needy borrower, at the risk of
losing not only his interest or profit but also his capital, and
to stipulate for so much interest as the borrower will freely
consent to pay him. It is true that Loans of this character make
more people wretched. Making away with both capital and interest
they are more impotent to recover themselves than the farmer who
does not carry off the land. But the bankruptcy laws being
favourable enough to debtors to allow them to start again it
seems that usury laws should always be adjusted to market rates,
as in Holland.
The current rate of interest in a state seems to serve as a
basis and measure for the purchase price of land. If the current
interest is 5 per cent or one-twentieth part the price of land
should be the same. But as the ownership of land gives a standing
and a certain jurisdiction in the state it happens that when
interest is one-twentieth part, the price of land is at 1/24 or
1/25, though mortgages on the same land hardly pass the current
rate of interest.
After all, the price of land, like all other prices,
naturally settles itself by the proportion of sellers to buyers,
etc.; and as there will be many more buyers in London, for
example, than in the Provinces, and as these buyers who live in
the capital will prefer to buy land in their locality rather than
in distant Provinces, they will rather buy land in the vicinity
at 1/30 or 1/35 than land at a distance 1/25 or 1/22. There are
often other reasons of expediency affecting the price of land,
unnecessary to mention here, since they do not invalidate our
explanations of the nature of interest.